Friday, May 30, 2014

The children are our future. Raising children is the most important job. Growing up, these were a couple of adages I've heard regarding the importance of childrearing. Children eventually grow and become the next generation of leaders, innovators, and workers. This much aligns with how history and labor markets work. To have a good labor force in the future, we need to be mindful of raising children today. That is especially true when the child is a newborn, which is arguably when the child needs the parent's attention and care the most. To be able to juggle between career and parenthood, many suggest that the government mandates either maternity leave, paternity leave, or the gender-neutral family leave. In spite of women's liberation, maternity leave is still the most popular legalized variant of providing one or both of the parents with time off during the initial weeks of a child's birth because in spite of "the times changing," the mother still tends to be the one to care for children. Proponents like to show the following map to show just how far behind Americans are to the rest of the world with regards to maternity leave.

Aside from places like Papua New Guinea, Liberia, and Suriname, the United States is really the one country (certainly the only developed country) on the planet without any sort of mandatory maternity leave. Heck, even countries that violate human rights, like Cuba, Iran, Russia and China have paid maternal leave. "If those countries can get it right, why can't the United States?"
My initial response has to be more normative in nature, which is that entrepreneurs should be allowed to run their businesses how they want because that is a part of economic freedom. It's a reason why I also take issue with occupational licensing, anti-discrimination laws in the workplace, and minimum wage. In a free society, there has to be a very compelling reason to force a business to do otherwise. I would like to explore is whether a) the net externalities could begin to justify such a government mandate, and b) there are any unintended consequences that proponents might be overlooking.

Part of the issue here is that "the workplace" is still stuck in the 1950's. What I mean by that is that the mentality is such where it is assumed, at least in this context, that the husband is the breadwinner and the wife stays at home to tend to the family. Certain facets regarding family structure and labor markets have changed, and I don't even need to go into details about same-sex couples, for instance, to illustrate the complications here. There is that part of me that wants to say "If you want to have children, you better have the means to take care of your child. Otherwise, you have no business having children and forcing others to pay for your decision." On the other hand, as I will illustrate now, we have a labor market that discourages childrearing more than it has in the past. One facet is that in many instances, you need two working parents to make ends meet. The labor markets have shifted enough where it's difficult enough for most couples to afford having one spouse stay at home. Even if that were made possible, the couple would have to cut back on expenditures considerably. The second facet is that of single-parent households. If it's difficult enough for a typical two-parent household to make ends meet with children, imagine how much more difficult it is with the typical single-parent household. The third facet is that more and more women are entering the workforce, which should be obvious, but it also increases the need for maternity leave because there are women who are trying to maintain both career and motherhood. The fourth facet to contend with is increased turnover rate. "Back in the day," it was a much better guarantee that an employer can hire an employee and they will stay with the company for many years. These days, an employer is lucky if an employee stays for a few years. It can be worrisome for an employer if the employee takes maternity leave and then quits their job after the leave expires because the mother decides to be a full-time stay-at-home mother. Labor force attachment is a legitimate issue, especially if the mother plans on having multiple children. Even if the woman decides to return to the workforce, another individual, someone who is most likely less qualified and experienced within that particular role, has to fill the position. This could also have a spillover effect for all women. How so? Employers might be reluctant to hire women in general because the could see the possibility of a female employe having children to being cost-prohibitive. There is a rigidity in the labor market that leads many to have to choose between family and career. Not everyone has the luxury or the means to have both.

What about the Family Medical Leave Act (FMLA) of 1993? It provides up to 12 weeks of maternity leave. The maternity leave that this Act provides has many caveats. One is that it only applies to employers with fifty or more employees, which means that it doesn't cover 34 million employees in this country. One has to be employed at the firm for at least 12 months, and needs to have put in 1,250 work-hours within the past year, which is about 24 hours a week. The biggest caveat is that the maternity leave is unpaid. For those who decided not to or were unable to save money to have their finances withstand three months of unpaid work, this is indeed an obstacle.

Expanding the length of the woman's maternity leave [from 18 to 35 weeks] does not add additional benefit to the child's welfare nor does it create benefits for the couple's marriage (Dahl et al., 2013). The Dahl study certainly makes a case for not extending maternity leave, especially when it costs the taxpayers a pretty penny (The study does not compare maternity to no maternity leave....more on that in a moment). There is also the added benefit of improved child development (Baker and Milligan, 2008) or lower rates of depression in the mother (Dagher et al., 2013) to consider. Although maternity leave does not cause an adverse interruption of a woman's career progression, it also doesn't help that an extended maternity leave causes human capital depreciation for women, which still causes some issues for a woman's career projections.

Even with all of this considered, my answer to the question of "should there be mandated maternity leave" is "I don't know." I don't say that because I can't form an opinion. Looking back in my blog, I can essentially form an opinion about any topic with the proper research. The issue here is there is incomplete information. If I am to make an informed opinion, I still need two pieces of information. First, I would like to see how paid maternity leave affects an employer's decision to hire a woman. Does paid maternity leave create an additional disincentive for employers to hire woman, does it improve a woman's situation, or does it not matter? Second, while we have studies analyzing the effects of different lengths of maternity leave, there is not a reputable study or cost-benefit analysis comparing zero weeks of paid maternity leave versus "x > 0" weeks of maternity leave. It would be nice to see if no mandatory maternity leave is better than mandated maternity leave. There is economic intuition for both sides as to whether it works. It would be nice to revisit the issue when there is more information, but until then, I find that the question remains unanswerable.

Wednesday, May 28, 2014

A couple of days ago, the Council for the city of Jacksonville voted on extending a six-cent gasoline tax for another twenty years. While this might seem like a relatively minor occurrence, it got me thinking about the merits of whether an excise tax should be levied on the sale of fuel, particularly on the state and federal levels. Typically, the gasoline tax acts as a de facto imperfect user fee to help fund transportation-related projects, e.g., highways and other infrastructure, which is important because the infrastructure system is the lifeline of the American transportation system that provides transport, job, economic growth, and mobility. One of the issues with the gasoline tax is that overall, inflation-adjusted revenues have been on the decline.

There were some other ideas that I came across while doing research. One is to install toll roads. Although that would act more like a user fee than the gasoline tax, the upfront costs to replace gasoline taxes with toll roads would be astronomical. The Rand Corporation suggests that instead of implementing a tax on gasoline, we should implement one on oil (Crane et al., 2011), which has the advantage of making the tax more diffuse. There is the possibility of implementing a private-public partnership, but looking at other public-private partnerships, it may or may not work.

The idea that seems to best work is to tax the miles in what is known as a milage-based user fee. The Government Accountability Office conducted a study in 2012 showing that a milage-based user fee is more efficient than a gasoline tax. It's equitable (CBO, p. 15) and it's fiscally sustainable (O'Toole, 2012), not to mention that it cuts back on financial crisis issues. However, it comes with its issues. One has to do with tracking the miles. If one uses the odometer, that leaves it open to odometer tampering, i.e., fraud and tax evasion. A GPS might solve that problem, but it would considered an invasion of privacy because the GPS would track where and when people would drive. There have been implementations in which the tracking system only collects certain data, but with what the NSA did with regards to acquiring metadata, it's difficult not to be skeptical. Alternatively, there is the possibility of using your own GPS, smartphone, or other system to wirelessly track your milage without the government invading privacy. Furthermore, the tax would be collected at the gas pump, which means that electric cars would be exempt. Implementation would eat up a good chunk of revenues because adding in trackers into each car would be costly, especially with tracking and assessing a user fee (CBO, p. 18).

On the whole, I would say that we should relegate funding of the roads to the states because the federal government muddies things up. At least that way, there would be more competition and innovation of ideas. To make the infrastructure system more market-based, and thereby more efficient, the solution is going to be a portfolio of the aforementioned policy alternatives. For example, start the milage-based user fee with trucks only. Although they make up four percent of automobiles, they are responsible for twenty-five percent of milage travelled (CBO, p. ix). Increase the petroleum tax while decreasing the gasoline tax. States can install more toll roads while decreasing the gasoline tax. Whatever the mixture of policies looks like, one thing is for sure: the gasoline tax is on its way out.

June 22, 2014 Addendum: Brookings Institution senior fellow Clifford Winston wrote a paper on how the private sector can improve our infrastructure system. Worth the read.

July 11, 2014 Addendum: The Left-leaning Center for American Progress even realized the wonders of the mileage-based user fee in their latest report.

Monday, May 26, 2014

A few days ago, Ta-Nehisi Coates wrote this really lengthy piece over at The Atlantic about a case for reparations to African-Americans for all the damages done to them, which apparently has garnered some attention. African-Americans dealt with slavery in the founding days of this country up until the end of the Civil War. After emancipation, they then had to put up with Jim Crow and Plessy v. Ferguson's "separate but equal" dreck. America's past is filled with discrimination towards African-Americans, not to mention there was a whole civil rights movement to attempt to rectify it. Heck, there can still be a case made that discrimination and racism are lodged against African-Americans to this very day. Because of "the enduring legacy of our country's shameful history of treating black people as sub-citizens, sub-Americans, and sub-humans," Coates argues that all this wrongdoing is a basis for reparations. After looking at the piece, it sounds compelling and it certainly is distressing to read about the level of discrimination that African-Americans had to endure, but what Coates fails to realize is that forcing non-African-Americans to pay reparations to African-Americans isn't that simple.

Coates tries to analogize what happened between the Jews during the Holocaust and what happened to African-Americans. From Coates' point of view, this example sets precedence. The difference with the Holocaust example is that at least the individuals themselves were still alive to receive compensation from the German government. The African-Americans who were enslaved are deceased, as are their children. With the case of reparations for African-Americans, it would be the descendants who receive the reparations, not those directly affected by slavery. Even when using the example of imprisoning Japanese-Americans in internment camps during World War II, although 1988 was too long to wait [in terms of righting a wrong], it was not so late where the victims themselves could not be recompensed. As I will bring up later, if we are going to recompense anyone who has indirectly been affected by a past injustice, it's going to get messy really quickly.

Another example in America's short history that could be used for reparations is with regards to Native Americans. Native Americans have received monetary compensation for the lands ceded to the United States government. Using the Native Americans as an example for precedence has two shortcomings. The first is that the Native Americans have always been dealt with as tribes and nations, not as individuals. From a legal standpoint, the courts are enforcing treaties that were signed long ago. African-Americans do not have such legal standing or recourse. Second, the federal government has been mismanaging the lives of Native Americans for about two centuries now, and has done a bang-up job keeping Native Americans in a trap of poverty as a result. Do we want the government to subject another minority group? I think not.

For argument's sake, let's say that in spite of the previous paragraphs, we want to make the argument that the moral case for granting reparations in this day in age is perfectly justifiable. You still come across the greatest hurdle to accomplishing this: implementation. Trying to determine who receives them and who has to pay reparations would be an absolute nightmare.

Let's start with who would be recompensed. First, have fun trying to trace the genealogy of nearly 45 million African-Americans in this country. Even if one is able to accomplish this enormous undertaking, which would cost millions of taxpayer dollars and man-hours, the levels of victimization would be nigh impossible to identify, especially if you want identify any victimization perpetrated post-empancipation. There is also the issue of a number of African-Americans having some Caucasian descent within their gene pool, including our current president. Does a certain percentage of Caucasian ancestry negate being qualified for reparations? What about Caucasians who are a sixty-fourth or a hundred twenty-eighth African who happen to have a former slave in the family tree? If we are to look for Caucasians who have a small percentage of African ancestry, then we have to open up the investigations even more.

Let's continue with those who would have to pay because this facet brings in even more nuance. Should those who pay the reparations need to be individuals who directly benefited from this slave labor or indirectly? Let's first hypothesize by saying "those who directly benefited." When I say "directly benefited," I don't mean those who did the enslaving and economically benefited. Those individuals are long gone. Who I mean in this case are the descendants of slave owners, although I think it's unfair to punish individuals for what wrongs their ancestors committed because the descendants are not responsible for what their ancestors did. The kvetch from proponents is that "the United States built its wealth on the backs of slaves." From an economic standpoint, I would call that a tenuous overstatement because using slave labor to manage huge plantations was highly inefficient. Those in the South who managed plantations had shaky finances prior to the abolishment of slavery. The North, which used free labor instead of slave labor, had much more economic growth than the South. Should it be surprising that the region in the country that used slavery as a basis for its economy is still paying the price by being the least developed region in the country?

In terms of who directly benefited from slavery, we can take a more historical and more global look. For one, slavery was not a uniquely American institution. Not that I am justifying the institution by any means, but slavery was a universal institution for the longest time, and there were other slave trades, such as that of Brazil, ancient Rome, or the Arab slave trade, that were considerably worse. More to the point, the Atlantic slave trade was not merely an American operation. It involved many actors on an international level, which not only included European powers, but even neighboring tribes who helped capture other Africans. Do you really want to take other countries to international courts to try to get the monetary compensation sorted out?

Now how about those who indirectly benefited? The term commonly used for this indirect benefit is "white privilege." The theory behind "white privilege" is that even though Caucasians in this country did not directly benefit from slave labor, they still had a societal advantage because of the prejudices and racism that exist towards those of color. Using the whiteness of one's skin as a basis for paying reparations is not only racist, it's also unfair. What about those Caucasians whose ancestors were abolitionists or fought the South in the Civil War? What about those whose ancestors immigrated to America after the Civil War? What about Caucasian ancestors who were also discriminated against, such as the Jews or the Irish? What about those whose ancestors stood aside African-Americans during the Civil Rights movement? Is it fair to make them pay reparations when their ancestors helped? It's reasonable to assume that forcing Caucasians to pay a tax to recompense for slavery simply based on the color of their skin would only increase racial hostility.

Additionally, there is the matter of the price tag of reparations. As explained above, it would take a lot of resources to determine ancestry, validity of grievances, as well as monetizing wrongdoings. Even if that all were done, do you think it's a good idea to pay millions of African-Americans reparations when this country is dealing with its own debt issues? The political feasibility to front up all this money to recompense is simply not in the cards. There is also the question of just how much the federal government has attempted to undo the wrongs with monetary compensation. For instance, African-Americans make up a disproportionate amount of the recipients for food stamps, TANF, and Medicaid (although to be fair, they are underrepresented in receiving retirement benefits for Social Security). And let's not forget the Civil Rights Act of 1964 or affirmative action. Whether we discuss if the government should be involved in undoing past wrongs, if it has done a good job, or whether it can do a good job, we can't say that there are still certain imbalances and discrimination because the government didn't try to undo some of the wrongs.

Even if we were to argue that the government should be in the business of undoing the wrongs of racial discrimination, there are some questions we have to ask ourselves. If the government is to recompense for these wrongs, how about recompensing the LGBT community for the discrimination they have undergone in this country? How about what the Irish, Chinese, or other groups of immigrants of what they had to endure when they first arrived in this country? If we want to go even further back, can Jews around the world sue Egypt for the slavery they endured during biblical times? Where do we draw the line? There have been so many people wronged in history. Where would it end? It would be impossible to recompense African-Americans for a wrong that occurred 150 years ago. If the freed slaves would have been compensated shortly after the Civil War, which would have logistically and practically been the most appropriate time to recompense them, they very well could have taken on a different life, which could very well have given their descendants a different future. We can't go back in time and properly compensate those who were wronged from the onset of the problem.

Reparations would do nothing to improve race relations, and if anything, they would only be exacerbated. Rather than looking back, we should be looking forward to see how we could help African-Americans, and indeed all Americans, live a better life. If we are too look at how to specifically improve upon the lives of African-Americans to help mitigate some of the inequalities (because let's face it, there's going to besome sort of inequality in society regardless), although I'm sure I can come up with a comprehensive list, two ideas come to mind. One is more school vouchers for African-American students so they can have better access to high-quality education and don't feel trapped by the public school system. The second is to stop the War on Drugs. I say this because a disproportionate amount of those thrown in jail as a result are African-American. One in three African-Americans is expected to be in jail at some point in their lifetime, and the War on Drugs undoubtedly plays a pivotal role in this incarceration rate. It is more difficult to have a stable family life when one of the parents is in jail. Rather than throwing money at the problem with reparations, what we should focus on are policies that will empower African-Americans to live the American dream.

Wednesday, May 21, 2014

Saying that I dislike Obamacare would be an understatement. It has been the largest overhaul of the American health care system since Medicare and Medicaid. In spite of my aversion, I also realize that the probability that Obamacare will be repealed is very small. As much as I would rather not, the reality is that Obamacare is law and it is most likely to stay. Even so, that does not mean that we cannot improve upon the law. That was the idea when Nick Gillespie, the contributor to libertarian publication Reason Magazine, wrote 3 Ways to Make Obamacare Less Horrible. One of the ideas proposed was allowing for health insurance companies to sell interstate health insurance. Would forcing insurers to compete across state lines improve the quality of health care, or would it be too burdensome for the health care system?

The reason why the intuition is so alluring is because allowing for health insurance companies to sell insurance that crosses state borders means that states with more expensive health care plans can find cheaper plans. Looking at economic theory, competitive markets mean that there is a larger net economic welfare. A more competitive marketplace would bring about lower prices and more choices. Expanding the risk pool to the national level seems like good economics.

As alluring as this might be, there are some detractors. The primary complaint lodged against this policy alternative is the "race to the bottom," which would mean that consumers would be attracted to the least comprehensive health care plan because it would be cheapest. As a result, the quality of health care would decline (although in spite of Obamacare's attempts to improve access, it's backfiring, which is arguably already causing a "race to the bottom"). I have two counterarguments against the "race to the bottom" argument.

First, shouldn't the consumer be in charge of determining what sort of coverage they want? While navigating health insurance can be difficult, I would imagine that the consumer would have a better idea of what level of comprehensiveness they require than a distant bureaucrat. Something as important as health care insurance should be tailored to the needs of the customer, not to the misconceived notions of the government. For example, isn't it more than a distinct possibility that the reason why so many "young invincibles" didn't have insurance in the first place is because they didn't need it? Maybe offering a less comprehensive plan like a low-cost, catastrophic plan would do the trick. However, I know that Obamacare is focusing on accessibility and comprehensiveness, which causes the "healthcare trilemma" that makes it nigh impossible to reduce costs.

Second, the "race to the bottom" argument assumes a static market, which is contradistinctive to reality. It's like any other good or service: if you have a competing firm offering a cheaper good and more individuals end up consuming said good, you will either adjust your practices to be able to compete with the other firm or you will eventually go out of business. These market forces would essentially prevent a "race to the bottom." Plus, comprehensiveness is not a luxury that everybody can afford, which is why the consumer should be able to choose insurance that is within their price range.

There are some who argue that current laws allowing for interstate insurance, most notably with Georgia, are inherent failures. The reason why the Georgia experiment was a failure was due to bad timing. Obamacare was on its way over to the Supreme Court when Georgia decided to give it a go. Since the Supreme Court ruling would have profound implications for the health care regulatory system, it should be unsurprising that insurance companies were hesitant to even try it. Since no state has actually tried it, what we have here is an untested idea, which means that we need to rely more on theory than practice (i.e., case studies or analyses). Even though the Congressional Budget Office took a look at this policy alternative in 2005, the issue with using this analysis to disprove the policy alternative is that it was conducted pre-Obamacare.

An analysis conducted by health care consulting firm Avalere Health shows there is a mismatch effect amongst the states, which means that supply is not matching up with demand. This mismatch effect shows the needs to liberalize the health care insurance market. I would much prefer to treat health insurance like any other good because "special interests" have this uncanny propensity to lead to crony capitalism (Calabresi, 2013). The issue here is that we have to also contend with the reality of the insurance market.

Insurance regulation has been relegated to the states since 1945 with the McCarran-Ferguson Act. Much like auto insurance, each state has its own regulations, which include variations on regulating benefits and consumer protections. Even if insurance companies were more apt to implement interstate insurance policies, there would need to be transition costs, not to mention working with the state governments to make sure that the rigidities are minimized. While I think logistics would be complicated up-front, I would opine that they are not insurmountable, at least in theory. Given how the system is set up, there is little incentive for either the states or the health insurance companies to relinquish the control and power they have (Blumberg and Pollitz, 2010). And what about assigning jurisdiction when there are consumer complaints? Conversely, I would reply that this is hardly the first time this country has dealt with interstate commerce, and there are ways to adjudicate these cases.

In addition to the McCarran-Ferguson Act, Obamacare presents a couple of obstacles preventing a liberalized marketplace. One is the limit of age rating, and the other is eliminating the category of pre-existing conditions. These are obstacles because they prevent insurance companies from performing adequate actuarial risk, which means that there is even less incentive to buy insurance across state lines. As much as I would like for insurance to cross state lines, the insurance industry is so complex and nuanced that it would be exceptionally difficult to untangle the regulations that are in existence. There are way too many barriers of entry to the market, and breaking up local monopolies seems to be a prerequisite for being able to sell health insurance across state lines. It would be nice to expand the risk pool, but given the current system, I have to acquiesce in saying that "Unless serious reforms are passed that deregulate the market and actually help consumers, interstate insurance would not work, which means that Americans are screwed."

3-5-2016 Addendum: An article from the American Enterprise Institute on the topic just came out. Worth the read.

Monday, May 19, 2014

From doctors to hair stylists to restaurants, the government requires a plethora of businesses to acquire occupational licensing, which is the process of receiving permission from the government to practice a certain trade or profession. As of date, about 30 percent of workers are covered by licensing schemes. The premise behind this licensing is for the government to ensure the improved overall quality of the goods and services rendered, in the interest of the general public, to be sure. As nice as the concept of "ensured quality" sounds, it both literally and figuratively comes with a price that businesses should not have to pay.

If we looked at licensing in a sector-by-sector, I am sure we can find some sectors that could use some regulation. However, I think some soul-searching needs to be done when those who want to braid hair, be a nanny, practice dentistry, be a florist, or style hair need to jump through bureaucratic hoops and deal with red tape to live the American dream. The government has gotten hooked on excessive amounts of licensing, and we need to see a reverse in that trend. There are alternatives and reforms that can be implemented, including voluntary certification in lieu of governmental licensing or requiring that any current licensing laws are periodically reevaluated under major scrutiny after a certain period of time. I would like a labor market with higher rates of employment, less barriers to entry, and better quality of customer service that are impeded by occupational licensing. Evaluating which sectors need regulating and which ones could use some deregulating would be a good first step in engendering economic proliferation.

2-29-2016 Addendum: The Brookings Institution just released a policy memo on four reasons why occupational licensing causes social immobility.

11-1-2017 Addendum: The Wisconsin Institute for Law and Liberty released a peer-reviewed report showing that reducing occupational license standards to that of the least burdensome state in the 10 fields with the most occupational licensing would increase employment in those fields by 4.5 percent.

Friday, May 16, 2014

Last Saturday, Michael Sam was the first openly gay individual drafted in the NFL or any major sport. After receiving the good news, Sam turned to his boyfriend and kissed him while they were on television. Needless to say, there were some that did not react too kindly. There are some who didn't like it because "homosexuality is being shoved in peoples' faces." I find that to be amusing, and as for the reason, I'll give it to you straight: it's "normal" or "acceptable" for straight people to hold hands, kiss, get married, talk about their children, or post pictures on Facebook as a couple, but when gay people do it, it suddenly becomes "flaunting sexuality in others' faces?" Really? At least double standards these days are blatantly obvious.

Setting aside my derisiveness for a moment, I honestly think there is something more profound going on here. In American society, part of the definition of a "real man" has to do with the gender of a man's partner. "Real men sleep with women. If you sleep with another guy, that's totally gay." The fact that the word "gay" is still synonymous with the word "stupid" says something right there. The aversion here goes beyond one's sexuality. Football is seen as a man's sport. There are those who think allowing an open homosexual to be drafted into the NFL feminizes football.

But it's more than just football. We come across these sensationalized forms of masculinity and gender stereotypes all the time (Archer, 2010). Be a man. Man up. Real men don't cry. Boys will be boys. Men are taught that if they want to be "real men," they need to keep their emotions contained and not show them (Ben-Zeev, 2012). The problem with bottling up emotions is that they swell up and eventually erupt in a volcanic-like manner, which leads to nasty, and quite possibly violent, outbursts. It's going to be difficult to cover so much ground in such a short blog entry, but I would like to provide a brief overview on the problems of how America defines masculinity in such a constraining, counterproductive manner.

Before continuing, I would like to state I recognize that there are some fundamental differences between men and women. However, I'm not going to ignore the narrow, distorted definitions of masculinity that are nothing more than societal constructs. It can be as subtle as "wearing pink is not manly." It can be as something as noticeable and detrimental as "expressing emotions is what women do" or "having deep friendships with other guys is girly." You want to know why guys can't have healthy, emotional same-sex friendships that involve either emotional or physical intimacy? Part of it is because we have relegated emotions to being "feminine," but there's also the puritanical part of American society that has sexualized any physical intimacy between two guys. Forget something like two guys being comfortable enough with their sexuality to cuddle or spoon together and not have it be sexualized (Andreson and McCormack, 2014). In American society, when you see two guys holding hands, the default assumption is that they are a gay couple because people conflate affection with sexuality. Friends platonically hold hands to show the profundity of their friendship in places like Africa, Asia (e.g., India), and Arabic countries, of all places. You can't do that in this country without someone sneeringly labeling you as a homosexual. There was a time, even in American culture, when two guys could have a platonic relationship that included physical intimacy, and that relationship was so strong that it easily could surpass the profundity of their relationships with their spouses. Believe it or not, guys want to be really close to each other platonically, and it's exceptionally difficult to find that in this country because doing so is "too gay or womanly." If a man cannot develop emotionally healthy relations or have a healthy emotional outlet, how does that affect how men interact in society?

President Bush holding hands with Crown Prince Abdullah (2005)

For one, men are much more likely to commit suicide than women. I admit that part of the uptick has to do with the economy, but since a man's self-worth has been societally defined in the stark gender role of "breadwinner," is it a surprise that an economic downturn combined with a narrow definition of what makes a man contributes to this? It also doesn't help that the women's right movement and increasing equality in the workplace did not help with the ego of any man who holds to these narrow definitions of manliness. Christina Hoff Sommers at the American Enterprise Institute brings up the fact that men have lower rates of depression, but higher rates of suicide. The issue is that the vast majority of suicides in this country stem from depression, which means that men are hiding their depression because doing so is a form of "manning up." If men were allowed to express their emotions in constructive manners, I'd make an educated guess that fewer men would feel the need to resort to suicide.

In addition to suicide, hypermasculinity does not help with scholastic achievement (Santos et al., 2013), nor does it help with levels of male violence (e.g., bullying), particularly towards women in the forms of domestic violence and sexual violence. Since there isn't a correlation between gun ownership rates and homicide rates, I'm starting to subscribe to the theory that Americans are more violent than their European counterparts because of hypermasculinity. While inherent gender differences will maintain some sort of gap, I think that at least by addressing it, we can minimize the gender-based gap of violence. In spite of the research that might already exist, I would really be excited to see a meta-study that directly deals with how American society's narrow definitions of masculinity affect the upbringing of boys, as well as how grown men handle their lives. The same goes for a cost-benefit analysis on the topic, especially since measuring social costs is much trickier than something like the costs and benefits in the economic transaction of tangible goods.

I'm not advocating to get rid of masculinity. That would be ridiculous. What I would ask for is that we exchange the toxic masculinity that is so prevalent in American society for a healthy view of masculinity (e.g., being a gentleman) because I want men to have healthy relationships, as well as stable emotional and mental health. Both boys and men should be comfortable with their masculinity, but at the same time, we should remove the violence and aggression, not to mention the aversion towards emotions, that come with the stereotypical form of masculinity.

History has taught us that there are many legitimate ways to express masculinity that go beyond the stereotypical "manly man" with bulging biceps, aggressive behavior, needs to be "a player," doesn't cook because "that's what women do," and has to love sports and activities, especially football, hunting, or fishing. We need to realize that much like femininity, masculinity also comes with its complexities and nuances, which means transcending a simplistic view of machismo. Men also have the ability to care, show compassion, as well as exude sympathy and the ability to put himself in someone else's shoes. Replace aggressiveness with assertiveness. Resilience is a good trait to have in life, but men are also human and sometimes need to cry. Accepting our limits is a part of maturity and having a clearer picture of life, which is preferable to acting out or taking it out on others because emotions have been bottled up for too long. These are just some examples of how we can modify and expand the definition of masculinity for the better.

There isn't a government policy that is going to fix this problem, which I fittingly label as a negative externality. Much like with any civil rights movement, these types of societal changes require a bottom-up approach. The first step is to recognize the problem. After that, we need to find ways for communities to encourage positive male role models for children. We need to let boys and men know that it's okay to express emotions and that it's acceptable to have profound and intimate friendships with other males. We also need to recognize that much like with the federal government, there is not a "one-size-fits-all" approach to masculinity. Some men will be more attracted to more traditional definitions of masculinity. Others will be more comfortable with a non-traditional form of masculinity. Since people are diverse, we should encourage both forms of masculinity so that men can be both comfortable with their sense of masculinity while being able to live as enjoyable of lives as possible.

Thursday, May 15, 2014

Let's face it: Obamacare was a 2,000 page monstrosity of a health care bill. None of the politicians read the bill before passing it. We're still at the point where we're untangling the bill and discerning all the effects of the provisions in Obamacare. Aside from the individual mandate, the part of Obamacare that received a lot of attention was the employer mandate. The employer mandate was a penalty in the bill stating that any employer with 50 full-time equivalent (FTE) employees had to provide healthcare for their employees. The flowchart below illustrates how the employer mandate works.

In addition to the reasoning why the individual mandate received flack (i.e., you're forcing individuals to purchase a good or service), conservatives and other naysayers were, or rather are worried that the employer mandate will either cause less hiring or force employers to change their full-time employees to part-time in order to avoid the mandate. At least for the accusation of Obama creating a "part-time America," the data show that it essentially a myth. Whether it will cause more unemployment or adversely affect business practices, the evidence is primarily anecdotal since the mandate is not supposed to fully take effect until 2016. Proponents argue that the employer mandate is a necessary component to fund the health care exchanges. A recent report by the Left-leaning Urban Institute, however, refutes the necessity of an employer mandate. What has the Urban Institute found that can add to the discussion?

The most significant finding is that removing the employer mandate would only decrease the number of insured individuals by 200,000 (Urban Institute, p. 1), which would mean that the employer mandate is not necessary for Obamacare to survive (p. 4). What was also interesting was that the employer mandate acts regressively, which is to say that low-wage employees would take the greatest brunt of the mandate (p. 2-3). I also appreciated the sobering analysis that although economic theory would suggest that increasing the cost of labor would adversely affect employment, there are also other factors that go into hiring, including efficiency and reduced turnover (p. 2). There is also the reality that health care benefits can actually be used to attract high-quality labor.

But why is it that the employer mandate would not have a huge impact on the number of insured? Because the government already provides tax incentives to perpetuate the employer-based insurance system (p. 3). There is also the matter of revenue that would be lost by those 200,000 who would not be paying into the system. The Congressional Budget Office had the figure at $130B from 2014 to 2023, but the Urban Institute estimates to be a significantly lower $46B (p. 4). To quote the Urban Institute's summary (p. 4), "eliminating the employer mandate would eliminate labor market distortions in the law, lessen opposition to the law from employers, and have little effect on coverage." Since it's only projected revenue, I am inclined to say that if Congress wants to better fund Obamacare or contend with long-term debt issues, it should find better ways to go about it. To quote the Urban Institute's summary (p. 4), "eliminating the employer mandate would eliminate labor market distortions in the law, lessen opposition to the law from employers, and have little effect on coverage."

Keeping the employer mandate will most likely cause more harm than would be lost in the projected revenue stream (see here and here). The Obama administration has already delayed the employer mandate twice, but in reality, it would do well to simply eliminate a provision that is superfluous as it is unpopular.

If you walk in My statutes and keep my commandments and do them.....but if you do not hearken unto Me and will not to all these commandments.... (Leviticus 26:3, 14)

Much of Leviticus 26 details what happens if you obey or disobey G-d's commandments (also known as תוכחה). If you behave properly, G-d will provide such rewards as rain for your crops (Leviticus 26:4). However, if you mess up, it means that many curses will befall you, including terror and disease (Leviticus 26:16), dried-up land (Leviticus 26:20), and being smote (Leviticus 26:17). If we take the פשת (pshat; literal/plain meaning) the way we would have to interpret the passage is that our behavior has a direct causal effect on what happens to you (Rashi's commentary on Leviticus 26:3). "Do a mitzvah and you will be rewarded. Perform a transgression and G-d will give you your comeuppance." Too bad it doesn't fall that neatly into place, and here is where I take issue with a simplistic reading on the passage.

First, what is implicit in the passage is an all-or-nothing mentality. What happens when you make a mistake? It's human to err, so is G-d taunting us with an impossible task? Whatever happened to all the elements of forgiveness that exist within Judaism? Second, all of these rewards and punishments take place in the physical world, in the present world (העולם הזה). Since there is no explicit mentioning of an afterlife in the Torah [or the Tanach], does this mean that G-d is delivering all of His divine retribution in the here and now? It would explain why the concept of an afterlife in Jewish eschatology is post-Biblical in nature. Third, I believe in a G-d that is flawless. If He were going to deliver divine retribution, I would expect the correlation between performing mitzvahs and receiving reward to be unambiguous (i.e., R-squared value is equal to 1). There are evil individuals who enjoy material wealth and there are plenty of good individualsout there who suffer, which makes theodicy a legitimate concern here. In a cold, dark, cruel world that has plenty of injustice, how can we even begin to accept a literal or simplistic reading of this passage? Is there something else we can glean from this before becoming dismissive?

Nachmanides points out that G-d is not addressing individuals, but rather a community, which is why it's interesting to interpret it through a public policy lens. What happens when a community or a society enacts a top-notch policy? The populace and its quality of life are better off. When a detrimental policy becomes a part of society, the effects are adverse, and the community suffers as a result. It sounds alluring, but this is not a political treatise; it's a theological text, and we should interpret the verse within that context. Conversely, it's also possible to say that the results of society's actions can still be extrapolated from the text. Regardless, I don't find it to be the most compelling of interpretations.

R. Ibn ben Ezra has a different take on the matter, which is that because we are physical beings, we don't have an understanding of the spiritual world. G-d is essentially putting the punishment in terms that we can understand. Personally, I think G-d could have done a better job at conveying a sense of the spiritual world in the Torah instead of sidestepping it. While I think ben Ezra's interpretation has some truth in it, I think it's better to modify the interpretation in classifying the passage as a form of hyperbole to make a point. But this begs the question of what good would hyperbole do?

I believe that this hyperbolic passage is to get us to conduct some contemplative reflection on two levels. First is that our actions have repercussions. What we do as human beings is significant. One person can make a difference, and we shouldn't forget that society is still made up of individuals. The ideas that humans can come up with can create or destroy societies. Our words can uplift or knock down others. Our actions affect others, and can do good or harm. We should take the time to do some spiritual bookkeeping and work on improving ourselves.

The second goes back to that tease of "if we can't act perfectly, why bother" that I mentioned earlier. Much like with singing Dayenu during Passover, we're not meant to blindly accept what's put in front of us. It's meant to be a springboard for conversation. Maybe we're supposed to realize that we are only human and that tying our material circumstances to how we perform in life is tenuous. Perhaps we take a cue from Rambam (Hilchot Teshuva 9) and realize that true reward and punishment is not in terms of material possessions and wealth, but in something more transcendent, whether that is enjoying life's experiences [with others] or fostering a sense of spirituality in life. By realizing that "money doesn't buy us happiness," we can find a meaningful, more spiritually enriching life.

Tuesday, May 13, 2014

While Obamacare seems to be avoiding a death spiral (at least for now), it still is not succeeding in attracting enough young adults, also referred to as "young invincibles," to enroll into Obamacare. In spite of making concerted efforts to attract 18-34 year olds to sign up for Obamacare, according to the most recent numbers from the Human and Health Services, only 28 percent of the the eight million that have reportedly enrolled are young adults. This is a far cry from the 40 percent that the Obama administration wanted to enroll. Proponents of Obamacare have made Obamacare sound like such a good deal for young adults, so what gives?

First, we have to ask ourselves why youth enrollment is desirable. The reason why young people are the cause of attention is because young people tend to be healthier, which helps diversify the risk pool. Aside from that, one of the features of Obamacare is the limit of age rating in health insurance from 5:1 to 3:1, which means that insurance companies are not given leeway to assess actuarial risk. Not charging more elderly individuals the premium amount based on their actual risk to the health care exchange means that young adults will carry a disproportionate burden of the risk pool, which is more than their costs would have been otherwise. If the cost of buying insurance through the health care exchanges created by Obamacare ends up being more expensive than foregoing health insurance for enough young adults, then the situation creates a death spiral. That is why the intuition about Obamacare ends up being that Obamacare is a raw deal for young adults because it will discourage young adults from buying insurance through Obamacare.

Although there is a correlation between age and healthiness, one can argue that being young does not automatically mean being healthy. There are middle-aged individuals and even a few elderly individuals who have no real health problems to speak of, which means the death spiral scenario can be overblown. The Kaiser Foundation seems to think along these lines. Rather than assume the "death spiral" scenario, they only predict that a premium increase would occur. For argument's sake, let's assume that the Kaiser Foudnation, which is by no means conservative or Right-leaning, is correct that there would not be a death spiral, but only a "slight increase" in overall premiums (keep in mind that this does not include what the price increase would be for young adults, but just Americans in general). The problem with that is that one of the promises made by the Obama administration to force Obamacare down America's throat is that health care premiums would actually decrease.

Projections of youth enrollment has been steady thus far, and as projections stand, there is currently no worry about an adverse selection death spiral happening. However, this does not mean that Obamacare is in the clear. The Kaiser Foundation's "worst-case scenario" assumed that the youth enrollment rate only dropped to 25 percent. What would happen if it dropped below that point? There could be a major influx of elderly or ailing individuals. Young individuals could end up dropping coverage because premiums continually rise and they get sick and tired of propping up the insurance pool. While I don't think Obamacare is currently in danger of a death spiral at this time, I still think that Obamacare still needs to keep its focus on enrolling healthier individuals because it is still too soon to say what the net change in premiums for young adults will be and how it will affect the healthcare marketplace, particularly how it affects workplace health insurance. In the meantime, if Obamacare is going to remain the law of the land, the least we could do is create reforms to the law to it in order to make it less of a pain.

Monday, May 12, 2014

While we wait for the officials to count the votes of the Indian general election, it's not a matter of simply determining whether Rahul Gandhi or Narendra Modi will win the election. It's about what lies ahead for the Prime Minister of the world's largest democracy. As I pointed out a couple of years ago, India has a lot it needs to reform if it hopes to become a regional superpower, never mind a global one. Rather than look at its long-term prospectives, what I would like to do is provide a list of India's more pressing matters that can lead to the medium-to-long term growth that India desires:

Consistently high levels of inflation. India's inflation has been double digits for quite some time, which makes it difficult for Indians to save money. It also makes the rupee a highly volatile currency, a characteristic that is not optimal if India is looking to attract foreign investment. Although I am not going to come up with a solution to India's inflation woes here, what is certain is that India can use a heavy dosage of monetary and financial reform.

A need for a 21st-century infrastructure. If India has a malfunctioning transit system and constant power outages, how can India expect to ascend to "world power" status? As the Council on Foreign Relations illustrates, India needs to break through the government-regulated power system and bureaucratic stalling of infrastructure projects if it wants to be taken seriously.

Corruption. Much like any other developing country, India has its fair share of corruption. Transparency International (TI) ranks India 95 out of 175. TI did a report in 2011 about the extent of corruption in India. If India wants to improve upon its governance, the next Prime Minister needs to address corruption.

China. In spite of its bilateral trade relations with China, there is still a fair amount of mistrust between China and India, not to mention that India has a sizable trade deficit with China. Between further diplomatic meetings and financial reform, China will understand the importance of investing more money in its Indian neighbor.

Saturday, May 10, 2014

For those who did not know, today was World Fair Trade Day. In order to understand why we need to have a World Fair Trade Day, we need to understand the premise behind fair trade, which is to provide equity and sustainable justice to those in the supply chain, most notably poor farmers in developing countries, that do not receive proper treatment or wages. Those who buy products certified as "Fair Trade" believe that they are paying more for their product because the money from the price premium ends up helping the poor. I'm happy to see that the Fair Trade movement is based on voluntary transactions. It's certainly preferable to the government getting involved in labeling schemes or distorting the market. Seeing a more conscientious, ethical consumerism is also encouraging, and I hope that trend continues. However, what I have to ask is whether buying Fair Trade products is the most effective way to help those who it intends to or if it is merely feel-good consumerism.

One of the primary criticisms of the Fair Trade movement is that the money does not end up where consumers think it does. The theory behind Fair Trade is that the money goes to farmers on small farms who are disadvantaged by "the system." The problem with this in practice is that the individuals actually doing the farming, i.e. the grunt work, are migrant workers. Migrant workers, by definition, are too poor to own land and have to go from farm to farm to find work. This means that unless the farmer is lucky enough to be in a cooperative, the individual receiving the premium is not the farmer, but the landowner. Given socio-economic class stratification in places such as Latin America, it's safe to assume that the landowner, even if his property is not corporate size, is much better off than the farmers working the land. Even a large chunk of the premium does not go to the farmer, but rather other actors within the profit chain (Valkila et al., 2010; Kilian et al., 2006; Mendoza and Bastiaensen, 2003). One can go as far to argue that Fair Trade certification is actually harming the poor (Beuchelt and Zeller, 2011).

Since most of this premium does not even go to the intended party, in economic terms, buying fair trade is a subsidy to retailers of Fair Trade-certified products. One of the wrongs that Fair Trade certification is trying to mitigate is the market distortions that hurt farmers in developing countries. These developing countries have plenty of agricultural subsidies that distort the market, so why are we trying to fight one arbitrary price distortion with another? Wouldn't it be better to get rid of the initial price distortion to make sure that laborers are being paid fair market value?

There are some other issues with Fair Trade certification, one of which being that access to the Fair Trade label is restricted due to the price of certification, which is tantamount to rent-seeking. Those in the poorest countries cannot afford paying the certification fees (Beuchelt and Zeller, 2011), which is especially true if the farm is too small-scale. However, those problems are minimal as long as the Fair Trade market stays small. For those farmers who do decide to join a Fair Trade cooperative, there is the issue of creating market inefficiencies with monopsony, which means the fact that there is only one buyer and many sellers [of labor] in cooperatives translates into depressed wages. There is also the incentivizing of even more corruption than already exists because Fair Trade provides more opportunities for corruption (e.g., passing non-Fair Trade products off as Fair Trade, keeping wages low, acquiring kickbacks from Fair Trade premium). Additionally, fair trade only addresses income disparities, and not the price volatility it was initially meant to subdue.

Buying Fair Trade is not the way to go about reducing poverty. Fair Trade products do nothing to help migrant workers escape the trap of poverty. Heck, even the proponents of Fair Trade cannot even agree on what makes trade fair! Fair trade only produces a market of $7B [in 2011 dollars] out of a global economy of $230T [in 2012 dollars]. In terms of impact, most of the Fair Trade certified farms are in middle-income countries (e.g., Mexico, India, Peru, South Africa). Unless fair traders can find a standardized way to define "fair" without distorting the market too badly, fair trade will remain a niche market for consumers who are under the misimpression that they are making a difference. Even if there were better oversight and record-keeping, at best, Fair Trade certification focuses on a limited amount of small producers while ignoring the larger issues of poverty in developing countries. I don't want to say that Fair Trade certification is as big of a scam as organic food, but the large gap between perceived and actual benefits is comparable.

Does this mean that farmers in developing countries are deterministically doomed to a life of poverty? I think not. Free trade has historically pulled more people out of poverty than any government program has, and I am confident that it can do so for those who are currently struggling. When critics of free trade say that "free trade harms these farmers," it's because developed countries have freer economies than developing countries. Rather than a modest subsidy that does not even reach the disadvantaged producers, we should find alternatives that directly impact those in need. There is the possibility of or structural reform to have more liberalized markets, which will mean that farmers will have more purchasing power and consumer sovereignty in the long-run. We can also end agricultural subsidies both in developing and developed nations that cause the initial distortions in the agricultural markets. Developing countries can be more collaborative and export some agricultural technologies so these countries can develop more quickly.

Even though a lot of the required changes need to take place on a more global, macroeconomic level, we should still look at what can be done from the individual consumer's standpoint. It might seem counter-intuitive, but it might be better to buy premium coffee than fair trade coffee because premium coffee means that better care to pick high-quality beans requires better-paid labor. Assuming that more and more individuals buy premium coffee, the demand will increase and more higher-paying jobs would be created than under the fair trade certification scheme. If we're going to be more socially-driven, conscientious consumers, then we have to make sure our dollars are going to good causes. We can't be swept away by the false promises of fair trade certification. We either need to demand better quality from the fair trade certification process so some or all of the criticisms can go away, or we need to find better ways to spend our charitable donations to help those in need.

Thursday, May 8, 2014

In this week's Torah portion, we deal with a lot of laws surrounding the land of Israel and transactions with property. While describing the jubilee year, the Torah describes how one is to return to his holding (Leviticus 25:13), most probably due to foreclosure. When selling or buying property, G-d makes a point of not wronging one another not once, but twice (Leviticus 25:14, 17). After the second admonishment, G-d says that one should not wrong another, but "fear your G-d; for I am the L-rd your G-d" (Leviticus 25:17). In the context of the passage, we are specifically looking at real estate sales. Given the time period and the demographics of the parties involved, it only includes fellow Israelites, hence the usage of the word עם (fellow Jew/countryman). Two questions come to mind: 1) Why is there the repetition of wronging one's fellow, and 2) Can we extrapolate any principles from this scenario?

First, why does it matter if you wrong your fellow in real estate transactions? Why not simply care about one's bottom line? From a practical standpoint, markets would either not last too long or they would be on shaky ground if there is no credibility. Being able to trust other actors in a given market is what makes an economy grow.

Since G-d is not one to be superfluous in repeating the same admonishment twice, it would help to explain the difference between the admonishment in Leviticus 25:14 and Leviticus 25:17. In the first mentioning, it refers specifically to overcharging or underpaying in property transaction (Bava Metzia 50b). In the second mentioning, it refers to deceptive speech (Midrash, Leviticus Rabbah 33:1). In the specific context of business, one cannot verbally deceive the merchant with false hope of buying something when there is no intention to buy (Bava Metzia 58b). It is also forbidden for the merchant to deceive the customer with false advertising or misleading the customer into thinking they are purchasing something that they in fact are not (Choshen Mishpat 227-228). In the passage, there is also the phrase in Leviticus 25:17 of ויראת מאלהיך כי אני הי (fear your G-d because I am the L-rd your G-d). This phrase shows that business ethics are an intersection between humankind and G-d. Even though G-d was not directly involved in the financial transaction, He still gave this as a divine decree because people are created in His Image and should be respected for that reason, which is why the halacha behind business ethics applies to both Jew and non-Jew alike. In a general context, Rashi extends the admonishment in Leviticus 25:17 beyond the business realm and to harmful speech in general (Rashi's commentary to Leviticus 25:17).

Going back a few Torah portions, we see the phrase אני הי (I am G-d) repeated often enough in Leviticus 19 to make the point that we act in a holy manner because these laws come from G-d. However, I have to wonder why G-d felt He needed to mention אני הי only in Leviticus 25:17, and not in Leviticus 25:14. Why does G-d need to remind us of Him when it comes to verbal deception and not monetary deception?

I would argue that G-d needs to give us the extra reminder because it's easier to commit verbal deception. A court of law can prove fraud or embezzlement, but it cannot prove one's intent behind one's words. Only the individual and G-d can truly know one's intent, which is something that can be easier to hide than monetary deception. Monetary transactions tend to have transparency. Words, on the other hand, can be a tricky business. Words can be massaged to deceive another individual, even when they are technically true. Words can even be maliciously used when the target of said words does not even know about it, which is why the Jerusalem Talmud (Peah 1:1) likens foul words to an arrow because of the damage it can do from a distance. When you cheat an individual with words, you steal more than money. You steal their dignity because you make them look foolish. At least with money, the individual can be caught and the damage can be undone, but when you wrong someone with words, the damage is not so easily reversible (Choshen Mishpat 228:1).

As Hillel mentions in Pirke Avot (1:14), "If I am only for myself, what am I?," and does so to remind us that in this specific context, business transactions are about more than making profit. We have a responsibility to others when conducting business. We also have a responsibility to use our words to treat others with dignity, regardless of whether they are spoken during business hours. By stating twice that it is wrong to aggrieve another, G-d was expanding that both to physical and verbal transactions. Although this Torah passage deals with property transactions, the moral here is that we should be constantly concerned about the wellbeing of others and that the measure of our conduct towards others is a solid metric of our own holiness and connection with G-d.

Wednesday, May 7, 2014

Last week, the World Bank came out with its International Comparison Program (ICP) report, which provides comparative price data, measures the Gross Domestic Product (GDP), as well as purchasing power parities (PPP). The most controversial of these implied findings is that when GDPs are adjusted for PPP, which is a variant of the nominal GDP measurement, China's economy is predicted to surpass the United States by the end of this year. The nominal GDP is but one measurement of economic success, but it is still used as a primary yardstick of such success. Some individuals think it's cause for concern. Interestingly enough, the Chinese government has reservations about such claims. Is China's rise in the GDP [in PPP terms] a reason to worry or are people making a mountain out of a molehill?

First, we need to determine why adjusting the GDP in PPP terms is important. Comparing prices across borders can be tricky because the nominal GDP does not factor the value of the dollar in a cross-country fashion; it merely uses the current exchange rate to convert the GDP from one currency to another. The purchasing power parity is comparative measurement of what a certain amount of dollars [or other currency] in one country can buy in another country. A dollar can buy a lot more in China that it can in the United States, i.e., a greater bang for your buck. To adjust for comparison of living standards can help provide a clearer picture, which is why more and more economists are using GDP in PPP terms.

Much like with the nominal GDP, I also have my criticisms about using the GDP in PPP terms. When adjusted for PPP, the basket of goods examined is based on the price of the final good. The premise behind PPP is the Law of One Price, which states that identical goods should carry identical prices if the markets are efficient. The problem is that this economic theory does not play out well in practice. Let's first go with the assumption that goods or services are identical across borders. The Big Mac Index is an informal way of measuring the PPP. The Big Mac was used because it has cross-border similar inputs. Even under the Big Mac Index, we don't have identical goods. In Israel, the Big Mac is different because under Jewish dietary law, one cannot mix meat and dairy, which means that the Big Macs in Israel have to use both kosher meat (which is more expensive) and faux cheese. In India, cows are not considered sacred because they are considered sacred in Hinduism, which is why the Big Mac either contains chicken or mutton. Even going outside of the Big Mac Index example, it's not a stretch to believe that goods in one country are qualitatively different in another, which is why relative PPP might be a better metric.

Other factors go into defying the Law of One Price, such as transportation costs. The further a good has to travel to reach its final destination, the more it will typically cost. The transport costs are added into the price of the final good. Economic barriers, such as tariffs or taxes, alter the price from accurately following the Law of One Price. Demand for goods also do not hold constant across countries. Even if a good had the same supply per capita across countries, a lower demand in one country will mean that country has a lower price than another country. To assume that two families in differing countries have identical consumption baskets is untenable. These differentials make it more difficult to accurately calculate various countries' PPP, which is why it should be no surprise that the last time the World Bank published the ICP report for 2005, China's PPP-adjusted GDP was cut 40 percent in the last round of revisions per the World Bank methodology. It should also be no surprise that the World Bank factored in a margin of error up to 15 percent with their calculations (ICP, 2014, p. 23). Finally, this assumes that the numbers from China's National Bureau of Statistics are accurate, which isa tenuous assumption, to say the least.

Let's argue that in spite of the PPP's flaws, it still a good enough of a proxy to determine economic largesse. Should America worry? I don't think so. For one, in absolute GDP without PPP adjustments, the American economy still outpaces the Chinese economy by an approximate factor of two. Not to be too tautological, but the PPP measures purchasing power. Adjusting for PPP does not suddenly aggrandize the economy. One cannot purchase goods or services with PPP-adjusted dollars. One has to pay at the prevailing exchange rates, which is true in our global economy, and which is also why measuring the GDP as such is a better proxy for relative geopolitical power. There is also the issue that the GDP measures annual transactions and resets each year. Economies, however, do not reset. When looking at the wealth differentials between China and the United States, China lags behind the United States by at least $30T. Even if you want to argue that factoring in PPP brings us a more accurate picture, it doesn't matter nearly as much because none of these adjustments take in the population into account. When the GDP in PPP terms is adjusted per capita, you see a whole different picture (see below).

When adjusted for a per capita basis, the United States is 12th and China is 99th. Not only that, in per capita terms, China's economy is about a century behind America's economy. The GDP is an accounting device to measure domestic output, so none of this measures economic wellbeing in America in comparison to China, the composition of the economies, nor does it take innovation into account (see here and here). China also has a shrinking labor force and deteriorating economic health (also see here), not to mention China has larger issues regarding resource sustainability.

I imagine there will be a point when China's nominal GDP surpasses America's. There is a distinct possibility that China might pass the United States in per capita terms if it makes enough economic reforms. However, unless China creates structural reforms that allow for more liberalized markets or even focus on ways to improve upon the standard of living, I see this "milestone" as mere smoke and mirrors.

Rules About Posting Comments

Effective June 18, 2011, all comments will be subject to review prior to being approved. I have two simple rules:

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